According to Commonwealth Bank’s full-year 2018 (FY18) financial results, the number of new home loans settled dropped by $4 billion year-on-year, from $49 billion to $45 billion, with the bank’s mortgage portfolio now totalling $451 billion.
CBA CEO Matt Comyn attributed the fall in the bank’s residential lending activity to risk and pricing adjustments introduced by the lender over the financial year.
“[We] have been prepared to make some choices from both a risk and pricing perspective, which has seen us grow below system in home lending,” the CEO said.
“We will continue to make the right choices from volume and margin as we think about our home lending business. But overall, the core franchise of the retail bank has continued to perform well.”
However, Mr Comyn is confident of a recovery, informing investors that he expects 4 per cent home lending growth in FY19, despite acknowledging that “there will be subdued credit growth”.
Mr Comyn also claimed that he does not expect further credit policy tightening, pointing to comments made by the chairman of the Australian Prudential Regulation Authority (APRA), Wayne Byres.
“Consistent with the remarks from the chair of APRA, we see that the majority of the tightening work has been done, certainly at the margin, and there’s certainly some potential in the application of those policy changes,” the CEO continued.
“[We] certainly don’t see any big policy adjustments on the horizon. We feel like that 4 per cent credit growth, given what we’re seeing at the moment in the system, is about right, and of course, it’ll be a function of our performance against that system.”
Breakdown of CBA’s mortgage portfolio
Over FY18, CBA’S financial results revealed that the number of new owner-occupied mortgages settled by CBA grew from 67 per cent to 70 per cent, while the share of investor loans settled by the bank declined from 33 per cent to 29 per cent.
Interest-only lending fell sharply over FY18, dropping by 18 per cent from 41 per cent of new loans settled in FY17 to 23 per cent in FY18.
The proportion of new loans settled with variable rates increased in FY18, from 85 per cent to 86 per cent (81 per cent of CBA’s portfolio).
The share of new loans settled with lenders mortgage insurance (LMI) also increased, from 14 per cent in FY17 to 15 per cent in FY18.
Moreover, CBA’s results revealed that arrears underlying the bank’s mortgage portfolio also increased year-on-year, rising by 10 basis points from 0.6 of a percentage point in FY17 to 0.7 of a percentage point in FY18.
Mr Comyn claimed that the rise in delinquencies was spurred on by lower overall growth, “pockets of stress” in Western Australia and the Northern Territory, and the switching of loans from interest-only to principal and interest.
“There are three factors that we’re calling out; the first is lower growth and so, obviously, it has a denominator effect,” the CEO said.
“We also call out pockets of stress particularly in WA and the Northern Territory. We’re still seeing weakness in WA, less so in mining towns, and more so in outer metro and regional areas, but we’d like to think that has stabilised.
“The third factor is that we have seen an uptick as customers switch from interest-only to principal and [interest].”
However, the CEO said that he believes borrowers switching from interest-only loans would adjust to the change and “fall inline” with the “overall cohort”.
“What we’re seeing consistently, certainly to date, is with those interest-only cohorts, after a period of time, they actually adjust to the new repayment amount and fall in line with the performance of the overall cohort,” Mr Comyn noted.
“Part of that, of course, is making sure that we’re communicating clearly and well in advance of our customers, so we’re now writing out to them 12 months in advance of that switch.
“As we’ve broken down our book, there’s 79 per cent of customers coming to the end of an interest-only period actually have the option to be able to extend by at least one year, which means they’re well inside the maximum five-year on owner-occupier or the 10-year on interest-only period on investor. I think that distribution and adjustment is probably a bit smoother than perhaps some people would have otherwise anticipated.”
CBA’S profits slip by 4.8 per cent
Further, CBA’s net profit after tax (NPAT) took a hit over FY18, falling by 4.8 per cent to $9.23 billion.
Mr Comyn attributed the decline in profit growth to “one-off” payments, which included CBA’s $700 million AUSTRAC penalty, the $20 million settlement paid to ASIC for alleged bank bill swap rate (BBSW) rigging, and $155 million in regulatory costs incurred from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“There has been a number of one-off items that have impacted the result, including a couple of large penalties that we have resolved. If you strip some of those out, actually the result looks more from an underlying perspective up 3.7 per cent,” Mr Comyn said.